The Prolonged Resolution of
Troubled Real Estate Lenders During the 1930s

This paper studies how building and loan associations (B&Ls) slowly unwound their obligations following a set of financial shocks during the Great Depression, with a special focus on a group of particularly troubled B&Ls in Newark, NJ. Investors in B&Ls disagreed over whether to
realize losses on foreclosed real estate holdings, and those investors favoring liquidation were unable to force action after legal developments nullified statutory withdrawal privileges. In the medium run, a market-based resolution mechanism developed in the form of a secondary market for B&L
liabilities. Liability holders barred from withdrawal incurred large losses while liquidating their investments on this market. At the same time, B&Ls used the market to avoid realizing some losses by exchanging foreclosed real estate for their second-hand share liabilities. More formal
resolution ultimately took place from 1938 to 1943, first consisting heavily of closures, and then of reorganizations. Reorganizations were spurred by a large scale federal intervention arranging for the creation of bad banks, liquidity injections, and liability insurance.

JEL Classification: G21, N22.

1. Introduction

Building and loan associations (B&Ls) were an important source of residential real estate loan funds during the interwar period. This paper studies how one set of particularly troubled B&Ls in Newark, New Jersey, slowly unwound their obligations over the late 1930s and 1940s, following financial shocks which included credit losses on foreclosed real estate and demands for withdrawals from investors.1

Key to this story is the absence of contractual or statutory mechanisms that could have forced resolution more quickly. To prevent some B&L investors from withdrawing at 100 cents on the dollar while leaving losses for remaining investors, New Jersey legislators and jurists revised statutes
and issued new legal interpretations that allowed B&Ls to restrict withdrawals until loss reserves were established. However, establishing such reserves often took years, and in the interim B&Ls had no clear path for achieving consensus over whether to realize losses and how to allocate
losses once realized. These associations struggled for a decade to find such consensus and unwind their obligations.

In response, a secondary market for B&L liabilities, known as shares, emerged in the mid-to-late 1930s.2 This was a market-based resolution mechanism
that allowed shareholders to exit their associations, though at steep losses. Similar markets existed in many major cities and were an important feature of the Depression experience for those who accumulated savings through B&Ls.

Importantly, this secondary market was also credited for helping clear the housing market. Buyers of discounted shares subsequently used those shares to purchase real estate from B&Ls at the much higher book value of the shares. B&Ls preferred these transactions to cash sales if the book
value of the shares exceeded the cash price a property could command, as this allowed the association to avoid realizing some losses on its books. Therefore, it was possible for both the buyer and seller of real estate to be better off by exchanging real estate for shares rather than cash, because
of the loss previously borne by original holder of the shares.

The median trading price of B&L shares in Newark was low, about 40 cents on the dollar of book value during 1939 and 1940. The pattern of market prices across associations is consistent with the primacy of withdrawal considerations, as investors took the largest discounts on shares of
associations that were least able to pay withdrawals. In contrast, solvency characteristics have less explanatory power.

The secondary market began to fade in the second half of 1940 as more formal resolutions picked up. The Newark industry was reduced from 499 associations in 1930 to 55 associations in 1945. From 1938 to 1940, a wave of associations exited heavily through voluntary liquidations and state
seizures. These associations tended to have larger holdings of foreclosed real estate, to be less profitable, and to have relatively heavier discounts of their shares on the secondary market. In 1942 and 1943 another wave of associations went through reorganization. The main reorganization strategy
involved spinning off bad assets (foreclosed real estate, delinquent loans) into separate bad banks, receiving a liquidity infusion from the Reconstruction Finance Corporation (secured by the bad assets) to satisfy unpaid withdrawals, and qualifying for insurance by the Federal Savings and Loan
Insurance Corporation. The RFC cash was critical to addressing the persistent maturity mismatch, and the war-time economic expansion also contributed to the liquidation through higher real estate prices.

The late timing of these resolutions significantly lags the pattern characterizing commercial banks and some (but not all) B&Ls in other parts of the country (See Richardson (2007) for commercial banks and Ewalt (1962) and Snowden (2003) for B&Ls). The slow resolution of these
institutions also relates to a literature, traditionally in the context of commercial banks, regarding depositors' access to funds during downturns (Anari, Kolari, and Mason (2005), Rockoff (1993), Kaufman and Seelig (2002)). B&L liabilities have not historically been considered part of the
core money aggregates and in fact appear to have become less money-like during the height of B&L troubles. Lack of access to savings in B&L was a fact of life across the country during the 1930s.

2. Background

2.1 General B&L background

Building and loan associations, the predecessors of savings and loan associations, were generally mutually owned thrift organizations that invested almost wholly in real estate loans.3Here I focus largely on the industry as it existed in New Jersey. There was a certain amount of diversity in B&L practices across the country, and so readers interested in a more thorough and geographically generalized
discussion would find useful the information in Snowden (1997, 2003), Snowden and James (2001), Bodfish (1931, 1935), Bodfish and Theobald (1938), Clark and Chase (1925), and Ewalt (1962).

The 499 B&Ls in Newark at the end of 1930 were generally quite small, as the median number of investors was about 450 people. State law put some limit on B&L size through prohibitions against branching or the use of agents, and against loans on properties outside of New Jersey. These
restrictions should not be overstated, though, because large associations did exist in the state. The West End B&L, for example, had 33,000 investors and was one of the largest B&Ls in the country.

Snowden (1997) suggests that the small traditional size of B&Ls (not just in Newark but across the country) was a choice of the associations' management (e.g. local builders) who had little desire to manage associations larger than what was necessary to provide financing for their other
businesses.4 All things considered, though, the extreme preponderance of associations in Newark was a bit unusual, though shared by neighboring cities in New
Jersey, Pennsylvania, and Maryland. Total membership among Newark B&Ls was roughly 425,000 during 1930, in a city with 444,000 people.

Table 1 displays the aggregate balance sheet of Newark B&Ls in 1930 and 1937.5 Most assets were in real estate loans, primarily
residential, though some associations also invested in commercial properties in the 1920s, particularly apartment buildings and some small mixed-use properties. This expansion into non-owner-occupied lending was criticized, at least in retrospect, but its extent is difficult to quantify as the
published balance sheets do not separate out different types of real estate.6 Holdings of non-real estate assets were fairly negligible prior to the Depression
but became quite important by 1937.

On the liability side, New Jersey B&Ls were funded mainly by traditional equity shares. The resulting ownership structure was quite diffuse, motivated traditionally by mutual ideals. In an "installment" share, a shareholder committed to monthly payments, and the share would mature when
those payments, combined with apportioned profits (retained earnings), reached a prefixed maturity value, typically $200 in about 11-12 years (roughly $2700 today adjusted for inflation). These liabilities were meant to reduce maturity mismatch with assets, but in practice withdrawal privileges
undermined the long-term nature of these shares. Other funding was also obtained with "income" shares, which were similar to certificates of deposits, as the full maturity value of an income share was paid up front and cash dividends were then paid out instead of accumulated.

2.2 The Depression Foreclosure Crisis

The nation as a whole experienced a severe foreclosure crisis in the early and mid 1930s. Wheelock (2008), White (2010), Courtemanche and Snowden (2010), Fishback, Lagunes, Horrace, Kantor, and Treber (2011), and Rose (2011) provide background on this. In general, the "double trigger" theory
of borrower default emphasizes the importance of negative income shocks combined with lower property prices.7 Both triggers were present in the 1930s. In
Newark, unemployment was still about 16 percent in 1940 according to the census, and another 4 percent of the labor force was in emergency relief programs. The median value of owner-occupied housing in Newark fell to 52 percent of its 1930 level by 1940, compared to 61 percent in the country as a
whole. Much of the decline likely occurred in the first few years of the decade, but even in 1939 a federal survey described real estate prices in Newark as "still shrinking from the high levels of the late 1920s."8

In such an environment, foreclosures mounted, and correspondingly there were very large increases in holdings of foreclosed real estate at Newark B&Ls. Table 1 indicates that real estate accounted for 54 percent of Newark B&L assets in 1937. The annual flow of
foreclosures in Newark did not materially decrease from its peak until 1937, and were still quite elevated in 1939. Prodigious quantities of institutionally owned real estate had a persistently depressive effect on prices in the market. In 1938, a federal agency noted that, in northern New Jersey,
"At least until such time as this liquidation by the B&L associations is farther advanced, there would appear to be little prospect of any improvement in prices; possibly even the contrary."9

2.3 Imposition of Withdrawal Restrictions

During the 1930s, withdrawals picked up as shareholders desired access to their savings amidst the weakened economy. Withdrawals gained urgency as shareholders lost confidence in their B&Ls.10However, many B&L members were reluctant to liquidate foreclosed real estate in order to meet other members' withdrawals, given the depressed real estate market. In addition, since B&Ls in New Jersey carried real estate at
cost of acquisition rather than market value, realizing losses on real estate could possibly lead to insolvency.

These problems were without much recent precedent, as B&Ls had rarely if ever been subjected to such large withdrawals, certainly not during the prosperous 1920s. B&L bylaws sometimes maintained two restrictions on withdrawals. The first was a requirement for advance notice, typically 30
days. Many contemporary sources note that these requirements were not enforced during the 1920s as they were unnecessary, and the subsequent enforcement during the 1930s took shareholders by surprise. The second was some sacrifice of apportioned profits. Apportioned profits typically vested at 20
percent a year, so that by the sixth year of the savings contract, no sacrifice occurred. Since apportioned profits were fairly small during the first five years, this was not much of a deterrent.

Statutory withdrawal restrictions turned out to be more important in practice. Up to the 1930s, New Jersey law held that no withdrawals could be delayed for more than six months. During that six months, withdrawals were to be paid in the order received, and no more than one half of revenue was
required to be paid out. Two major changes occurred in the early 1930s, as the six month limit threatened to send much of the industry into the hands of the court as investors sued under the six month rule.

First, in mid-1932, the New Jersey Supreme Court ruled that even after six months, withdrawals could still be restricted, on the basis that withdrawal was a statutory privilege rather than a contractual right. The court held that the statutory privilege could be rescinded for two reasons. First,
withdrawals would cause "forced sales in these times when there is no market for real estate and association mortgage assets, repayable in shares, are unsalable." Second, "the statute should not apply where the exercise of the right granted thereunder would disturb the financial stability of the
associations or materially depreciate the value of the shares of the remaining members."

A second development occurred in the legislature which, under "emergency" powers first asserted during 1933, passed a new law that allowed the B&Ls' regulator (the Commissioner of Banking and Insurance) to restrict withdrawals at his discretion. This authority was repeatedly extended until
September 1940, and though the original law and its extensions were challenged many times on constitutional grounds, it appears to have never been struck down.11

These developments could be interpreted either as altering the rights of shareholders, or as clarifying those rights. These withdrawal restrictions were quite consistent with the pre-existing idea that both profits and losses should be mutually shared across all B&L members. Shareholders
would have been familiar with the concept since mutuality was a central selling point for B&Ls to their investors, a central ethos of those associations, and a key legal foundation that allowed B&Ls to avoid federal taxation. Nevertheless, no law during the 1920s allowed withdrawals to be
delayed for years. Also, it was largely unanticipated that associations would be unable to agree on whether to realize losses and how to allocate those losses. That discord was a decidedly nonmutual eventuality, and obviously some shareholders were more willing to realize losses than others, as
evidenced by those who sold their shares on the secondary market.

2.4 Fallout from Withdrawal Restrictions

Withdrawal restrictions lasted for years at many Newark B&Ls and were a disaster for shareholder relations. Comprehensive data on withdrawal restrictions are not available, but reports and examples from the period abound. As late as 1939, a Federal Home Loan Bank Board report noted that the
"majority of the associations are still on a restricted withdrawal basis."12 In 1940 the Secretary of the New Jersey B&L League similarly stated that,
prior to many reorganizations, "shareholders were being paid little or nothing, perhaps $25 a month as a necessitous case."13

The largest association in Newark, the West End, fits this pattern. In 1940, it had "an unpaid withdrawal list reaching several millions which hadn't been materially reduced since about 1933." Before it was reorganized, "many of the shareholders thought that it was frozen tighter than any
concrete that was ever poured."14 The RFC, considering a loan to the West End for reorganization, noted that the West End's "frozen nature has caused many
shareholders to withhold their monthly payments and not reinvest their maturities, as well as to react against new shareholder investments." Of five associations with RFC loan files between 1938 and 1941 that I have viewed, all were still restricting payment on withdrawals, and some on maturing
shares.

The result was that B&Ls had "completely destroyed public confidence by restrictions on withdrawals and recapture of dividends" already by 1935.15
In 1939, the same characterization remained: "Building and loan associations in the Northern New Jersey Area, once having resources per capita ranking among the highest in the country, today, excepting a comparatively few, are in a generally frozen condition and lack public confidence."16

The only solution offered by supervisors was the establishment of loss reserves. Loss reserves were important because, if inadequate, members withdrawing at 100 percent of book value would avoid incurring their share of their associations' losses. Therefore, under the new emergency powers, the
state B&L regulator required strong withdrawal restrictions until adequate loss reserves were assembled. Accumulating these reserves was costly. Newark B&Ls had entered the Depression with loan loss reserves constituting less than 1 percent of liabilities. To establish new reserves,
associations were required to first convert unapportioned profits, then to reclassify previously apportioned profits (kept on books until shares matured), then to further accumulate through new earnings.17

To establish loss reserves, associations commonly reclassified another liability item, apportioned profits, into general loss reserves. In 1935, one out of every three associations had zero apportioned profits, meaning all had been converted into reserves. Reclassification of apportioned profits
was subject to return to shareholders if reserves ultimately exceeded losses, which contributed to the unwillingness of B&L managers to actually tap the loss reserves so created. As an example, Table 9, discussed below, itemizes the loss reserves held by the
Enterprise B&L in 1941; 40 percent of the loss reserves were still kept in a separate account and had not been used, having been established by recapture of apportioned profits half a decade earlier.18

Without the discipline of meeting withdrawal demands, complying with modern accounting standards, or the guidance of an effective regulatory resolution regime, real estate liquidation and loss realization was repeatedly put off. As late as 1940, the President of the Federal Home Loan Bank of New
York described Newark's B&L managers as hoping for a miracle:

In far too many cases, the directorates of financial institutions substantially burdened with foreclosed real estate, rather than facing the facts and marketing their steadily depreciating properties at current values (writing off whatever loss may be necessary in the process) are,
unconsciously perhaps, engaging in one of the biggest real estate speculations of all time. For in such cases managements are refusing to sell at current levels solely in the hope that at some future and undeterminable date they will be able to get higher prices."19

One B&L manager described some colleagues as "apparently waiting for the millennium to come before selling their properties. They have their eyes only on the cost."20

These delays in loss realizations helped lead to the creation of the secondary share market, in which shareholders realized losses that associations as a whole refused to. This market is examined in the next section.

3. Secondary market

In response to withdrawal restrictions, by the late 1930s it became common practice for B&L shareholders in Newark to liquidate their shares on a secondary market, though at a loss.21The demand side of the share market largely consisted of people purchasing shares in order to use them as a means of payment for real estate, as Newark B&Ls sold their real estate in exchange for their own share
liabilities.22 In this section, I sketch the economics of why these transactions were in the interests of each party, and give special attention to how this
was a market-based resolution mechanism to unwind the obligations of B&Ls.

3.1 Development of the market

Market functioning was aided by so-called speculators, who helped provide liquidity, and by brokers, who intermediated between buyers and sellers.23 Not
much can be said about the speculators, but regarding brokers there is evidence of a fairly competitive market; in 1939, at least 9 brokerage firms regularly advertised their services in a Newark newspaper, the Sunday Call. Examples of such advertisements are reproduced
in Figure 1.

The earliest hints of the B&L share market start in 1933, when the first advertisements for broker services appeared, such as in Figure 1. It was not until 1938 that the market appears to have really matured. In 1938, managers were still uncertain how their shareholders
would react to the maturing market, and whether they would have even more difficulty recruiting additional shareholders if such prospective shareholders saw their shares trading for twenty five or fifty cents on the dollar.24 Meanwhile, state regulators and leaders of the B&L movement saw the share market as an opportunity to liquidate the industry's real estate, and so consistently exhorted associations to exchange real estate for shares. These
efforts succeeded. Over 1939, trading activity spread to the shares of more and more associations. By the end of 1939, most shareholders had become familiar with the market, how it worked, and why it existed.25

The market appears to have been at its most active from 1938 to 1940. Trading activity then declined in latter 1940 and especially 1941. These declines were generally attributed to years of real estate liquidation which left the stock of remaining properties reduced, and to a decline in the
number of shares for sale at low prices, perhaps as the most desperate shareholders had by 1941 generally sold their shares.26 Advertisements for broker
services became more common in the late 1930s, peaking at about 9 or more in each issue of the Sunday Call in 1939. Advertisements then fell to three by 1941, two in 1943, and zero in 1946.

3.2 Why did the share market help clear the housing market?

The share market was widely credited with helping clear the housing market. It is not immediately apparent why such a market was necessary for this purpose: clearing the housing market would presumably require prices to drop, but B&Ls always had the option of lowering their prices, and had
long resisted doing so. In order for the share market to clear the housing market, it would have to provide B&Ls some benefit over a cash sale, while still lowering real estate prices for those on the demand side of the housing market.

A simple balance sheet exercise has a way of clarifying how this was possible. Suppose that an association had the simple stylized balance sheet depicted on the left side of Figure 2, and it was trying to sell a piece of real estate valued on its books at $20, though the
cash market price was $12. If sold for $12 in cash, loss reserves would be depleted by $8 and the association's coverage for future losses would look a bit doubtful. Alternatively, suppose that the association's shares were trading at forty cents on the dollar. A real estate purchaser might be
willing to purchase, say, $20 worth of shares for $8 in cash and exchange those shares for the same parcel. Loss reserves would not need to decline at all, but it is important to realize that a loss did occur: some shareholder realized $12 in losses on their shares. At an upper limit, the real
estate purchaser might be willing to exchange up to $30 of shares, since those shares could be purchased at $12, the cash market value of the property. At the lower limit, the B&L would have no incentive to accept shares with book value of less than $12.

In essence, there were two prices. The nominal price was the book value of the shares, which determined the amount of liabilities the B&L could retire. The effective price was the price of obtaining those shares, which is what really matters to the real estate purchaser. This helped clear
the housing market because the effective price dropped. This is an interesting situation in which both the supply and demand sides to the real estate transactions benefitted by the use of shares; the key is that these benefits originated in the loss taken by the shareholder who sold shares. By
realizing a loss via the secondary share market, a shareholder essentially created a surplus that was available to two parties: the other shareholders of their B&L, and the real estate purchasers.

Contemporary sources support the idea that prices worked in this fashion. A summary of the Atlantic City share market stated this idea most starkly:

The customary method is to mark up the value of the property to a point where the discount price of the shares will result in a present day, fair cash value. For example, take the case of a piece of real estate worth $5,000 in today's market. If the shares are selling at fifty cents on
the dollar, in an all share sale, the association promptly fixes the price at $10,000 irrespective of the its book value or worth to them."

I suspect this quote overstates the case a bit; it seems more likely that the parcel mentioned would sell for a bit less than $10,000 in the presence of transaction costs to obtain second-hand shares and some bargaining power on the side of the real estate purchaser. Other examples fit this
pattern, including a case study that was discussed at length in a conference of B&L managers in mid-1938. An association was willing to sell a piece of real estate for $1,000 in cash and a $5,200 mortgage, but a second offer was made for $800 in cash and $6,700 in shares. The second offer is
attractive to the real estate purchaser, since the shares were more than likely obtained for half price or less--about $3,350. The second offer is also attractive to the B&L on the supply side, since, with a nominal price of $1,300 more than the first offer, fewer losses would have to be
realized by the B&L's remaining shareholders.

Another example fits the same pattern. A B&L manager described how his association had acquired a property with book value of $10,000, expected a loss on the property, and had two offers for its sale. The first was for $8,500 in cash and a mortgage, the second for $6,000 in cash and $5,000
in shares. The second offer actually gave the association the rare opportunity to record a gain on a piece of foreclosed real estate, and still involved a smaller outlay to the purchaser than the pure cash offer.27

As in the preceding examples, payment for real estate typically consisted of some combination of a cash down payment combined with a mortgage or with shares.28To be clear, if the shares were part of the transaction, they would be applied to the nominal transaction price at book value, and subsequently cancelled as liabilities. Associations considered both types of offers.

This helps articulate the sense in which the secondary share market helped associations liquidate real estate and clear the housing market. The New Jersey state regulator, for example, described the competitive edge of B&Ls in this manner:

A considerable volume of sales is resulting from the use of shares in exchange for real estate. Many associations are able to secure a competitive advantage in the real estate market by this means and have thus been able to create a real estate activity which otherwise would not have
existed. This has resulted in returning a considerable amount of property back to private owners thus reducing the overhang of institutionally owned real estate.29

This quote indicates that the cash market value of real estate was low enough that B&Ls chose not to transact; the share market helped "create" these transactions by lowering the effective prices. After all, by 1938, the real estate market was not as dysfunctional as it was in 1933; at a low
enough price, a B&L would have been able to sell its real estate for cash and a mortgage, albeit at a realized loss.30

While lower prices helped B&Ls sell their real estate, this was not necessarily a positive development for the housing market. Working through the overhang of real estate may have boosted expectations, but in the short run this effect could easily be dominated by the cheap effective prices
of B&L real estate. When households are deleveraging, fire sales of real estate can damage the ability of owner-occupants to engage in transactions of their own that might increase economic efficiency. Along these lines, B&Ls faced criticism for their sales' negative effect on market
prices, as described by this HOLC report:

Building and loan associations as a whole are being charged with `dumping' of acquired properties due to their acceptance of shares at par toward purchase price of real estate, when such shares could be purchased at substantial discounts.... It is open to question whether it is really
dumping or whether it is not merely finding levels at which business can be done.31

Other HOLC documents note that the HOLC was at a competitive disadvantage against B&Ls because of the low effective prices via the use of shares. The HOLC was very much in a position to know this, since it owned large amounts of foreclosed real estate and sought to liquidate those holdings.

In some sense, B&Ls' remaining shareholders gained at the expense of the shareholders that sold their shares. While the second-hand share sales were voluntary and presumably Pareto improving, B&Ls used the share market to push an extra portion of their real estate losses onto the set of
shareholders who had sold their shares, rather than distributing those losses equally across all shareholders. This could be interpreted as a reward for patience. Alternately, it could be interpreted as compensating the rest of the association for the cost of early withdrawals, but this is less
compelling considering that withdrawal restrictions were often still in place in 1939 or 1940. In any case, the share market established a price of liquidity, which many years of history have shown can be mispriced during financial crises. Alternatively, B&L managers may have just preferred
that their paper losses be realized not by the association but by shareholders on the open market.32

3.3 Secondary markets in the rest of the country

Secondary B&L liability markets were common in the 1930s, though they certainly did not exist in every major city. Importantly, none of these markets existed before the Depression. Survey reports of urban real estate markets, conducted by the HOLC during the second half of the 1930s,
indicate that several large cities had active B&L liability markets, including Cleveland, Columbus, Indianapolis, Milwaukee, New Orleans, and Philadelphia. The surveys indicate that liability trading also occurred in a number of other smaller cities in Alabama, Mississippi, Florida, North
Carolina, Missouri, Indiana, elsewhere in New Jersey, Colorado, Texas, and California. Notably missing from these lists are all cities in New England, and some major cities with large amounts of B&L activity such as Chicago, Cincinnati, Louisville, Omaha, Pittsburgh, and St. Louis.

The share markets were a common but not uniformly prevalent feature of the Depression B&L experience. These markets generally worked to help associations dispose of real estate, but the exact mechanics differed from city to city, and few persisted into the late 1930s as Newark's did. State
laws regarding withdrawals differed, as did the take-up rate of federal aid and the structure of B&L liabilities. For example, a twist in some markets was the competing interests of depositors against shareholders. Allegations of corruption seem to have been not uncommon as well, with B&L
management accused of manipulating the share markets in various ways.

In the existing Depression literature I am aware of two references to secondary B&L share markets. Kendall (1962) briefly notes that "some" cities developed such markets, and specifically mentions Milwaukee, reproducing an offering sheet from a brokerage in that city containing approximate
market prices for the shares of 96 associations. Rockoff (1993) mentions that a secondary market for B&L liabilities existed in Youngstown, Ohio as well.

Table 3 gives a simple comparison between shares prices of Newark B&Ls and the prices of B&Ls in a limited sample of six other cities with B&L share markets. Newark B&L quotes are roughly in the same range as those in Oklahoma City and New Orleans, but
below the median prices in San Francisco, Cleveland, Columbus, and Milwaukee. Newark is somewhat of an anomaly as the first quotes available are from 1939, whereas in most other cities (except Milwaukee) the markets were at their height in the mid-1930s and no longer operating by 1939. Altogether,
more research is warranted on the timing of these markets across cities, the variation in share prices across and within cities, and the existence of markets in some cities but not others.

4. Examining Share Prices

4.1 Share price data

Data on share prices are available from January 1939 to December 1940. The source is detailed in the appendix. Information on prices in 1938 may exist but I have not been able to obtain them. The period from 1938 to 1940 is roughly the period when historical sources indicate trading volume was
at its most active. Over time, the quotes were published weekly, but short term volatility was quite limited: most shares do not change more than a few cents over the two year period. Of the 384 associations still active at the beginning of 1939, 60 percent have quotes available. Figure 3 contains a reproduction of one of the share price listings.

In January 1939, the median bid quote for the shares of active Newark B&Ls was 39 cents. For now, the median price is noted in order to gauge the scale of losses being realized by shareholders who sold their shares. A discount to 39 cents would represent a large loss for any shareholder
selling at the time. Figure 4 displays the distribution of share prices across associations. Some sold for as little as 20 cents on the dollar, and few exceeded 60 cents.

4.2 Cross-sectional characteristics of share prices

On the secondary market, what should determine the discount of B&L liabilities from their book value? On the one hand, the basic solvency of the association would affect the extent to which would the book value would ever be fully paid out. On the other hand, the earnings capacity and
liquidity position of an association would affect how soon those payments would come. Of course, liquidity and solvency are not wholly distinct concepts (see Carlson, Mitchener, and Richardson (2011) for example). Nevertheless, here I use those two terms in the sense of separating out the
probability of being paid full book value from the timing of those payments. In general, the liquidity aspect appears to be more important for share prices.

No perfect measures of solvency or liquidity are available. Assets held in real estate and loss reserves on the liability side are the best measures of general solvency, although it would be even better to know the expected losses on the real estate assets. In terms of liquidity, one useful
measure might be the size of a B&L's withdrawal list or the expected duration of a withdrawal request. These are not available in New Jersey, but they may be problematic even if they were available, since shareholders were known to not bother with requesting withdrawal if it were a fruitless
exercise.

Summary statistics of available balance sheet characteristics are given in Table 2. Some of these characteristics I will describe as being more associated with solvency, and others with liquidity. These variables essentially exhaust all available balance sheet
information. Liability side characteristics include apportioned profits per share, a dummy indicating if apportioned profits were zero, the extent of reliance on pre-paid "income" shares (supposedly a relatively "hot" funding source compared to installment shares), the extent of borrowed money,
and the extent of loss reserves. Asset side characteristics include the portions of assets held in real estate, arrears, and liquid assets, respectively, the log of total assets, and the share of mortgages that are unpledged, a measure of transition away from the old B&L mortgage. Note that
arrears are shareholders' obligated payments that have not been made, rather than arrears on, say, loans.33 Lagged values of some of these liability and
asset characteristics, from 1930, are also included. Finally, the year of establishment is included, as are dummy variables for whether the B&L received an RFC loan before 1935, whether it was a member of the FHLB, and whether it operated on the optional or non-serial plans (with the serial
plan associations as the excluded group).34

Table 4 reports the results of two simple OLS regressions of the share price on these characteristics. In practice, the variables I would associate with the liquidity effect appear to dominate, but the data are not perfect and so these conclusions should be taken with
that hedge.

The apportioned profits variables dominate the results. The magnitude is about a 3-4 cent change in the share price for a one standard deviation change in apportioned profits, along with an additional 3 cent drop in the presence of zero apportioned profits. These are reasonably strong changes
given that the share prices range from about 20 to 60 cents on the dollar. The simple regression of share prices on the two apportioned profits variables itself has an R-squared of 35 percent, reported in the first column. Figure 5 plots share prices in early 1939
against apportioned profits per share at the end of 1938, showing the correlation.

What do apportioned profits reflect? Arguably, they are more associated with liquidity than solvency, for the following reasons. Recall that apportioned profits are dividends applied to installment shares but not distributed until those shares reach maturity value. New apportionment was severely
constrained during the mid 1930s as associations were forced to build loss reserves, and existing apportionments were very often partly or wholly reclassified into loss reserves. By 1938, higher levels of apportioned profits characterized associations that no longer needed to build more loss
reserves. In turn, the important point here is that withdrawals were restricted by order of the state regulator until these loss reserves were established. Consequently, associations with more apportioned profits in 1938 were quite likely to be paying larger amounts of
withdrawals.

Another interpretation of the apportioned profits variables might focus on the fact that associations with more apportioned profits likely had higher dividend rates. If shares were fixed maturity bonds, then associations with lower dividend rates would likely exhibit larger discounts from par
value. Of course, installment shares were distinct from bonds inasmuch as their dividends were retained rather than paid out and the maturity value was fixed rather than the maturity date, and payouts at maturity were also restricted in the 1930s. Nevertheless, it is worth trying to distinguish
this yield effect from the withdrawal effect emphasized in the previous paragraph. To that end, I have a limited amount of data on dividends from a special HOLC survey of Newark B&Ls in 1938. Unfortunately, there are only 39 observations in which I observe this dividend information and have
share prices. There is a strong 64 percent correlation between apportioned profits per share and the dividend rate, which ranges from 0 to 5 percent. When the share price is regressed on both variables, only apportioned profits retain significance. That simple regression is reported in Table
5, and indicates that apportioned profits are capturing something else, arguably the withdrawal situation.

Returning to Table 4, another liquidity measure is the extent of asset holdings in cash and liquid investments. This measure of asset liquidity shows little predictive power in Table 4, even though this would seem naturally related to the ability
to pay withdrawals. However, more flexible nonlinear specifications do indicate that very low levels of asset liquidity are associated with lower share prices. For example, when when a dummy for very low asset liquidity term is included (not shown, measured as less than 2.5 percents of assets in
cash or liquid investments), B&Ls with near zero liquid assets had lower share prices on the order of about 1 to 2 cents, while the relationship fades for moderate and higher levels of liquidity.

It is also worth noting that large amounts of arrears were associated with lower share prices, although the magnitude is a moderate 1.5 cent change in the share price for a one standard deviation change in arrears over assets. Recall that arrears are obligated payments that shareholders have not
made. This is quite an intangible and dubious asset that would have done little to improve liquidity, but likely reflects both liquidity and solvency issues.

Few other variables have much predictive power, including some variables that would seem strongly related to solvency issues. Real estate holdings do not have any conditional statistical relationship with share prices, and the result is not dependent on the linearity imposed in Table 4, as more flexible quadratic and cubic specifications also have little predictive power (not shown). The size of loss reserves does not have predictive power, nor does the ratio of loss reserves to real estate holdings.

Altogether this evidence is consistent with a liquidity-centric story, though it is not fully able to rule out alternative stories. As one final piece of history, though, the experience of three B&Ls that experimented with real estate segregation in 1933 (discussed more in the next section
regarding reorganization) is relevant. By 1938, each had zero real estate or delinquent loans, since those assets had been placed in separate bad banks, with shareholders receiving certificates of participation in those bad banks. In no way could these re-organized associations be considered
insolvent, but their share prices were still trading between 37 and 53 cents on the dollar in 1939. The real estate segregation by itself did little to solve liquidity issues, which continued to weigh on shareholders who wanted access to their investments. This anticipates one of the key features
of most of the successful reorganizations of the late 1930s and early 1940s: cash loans secured by real estate which were then used to pay withdrawals that had been restricted since 1933. This is discussed at more length in section 4, below.

These results help us understand the share market, but do not tell us much about the root of B&Ls credit problems and why they varied across associations. Such an analysis is handicapped by a lack of data on issues such as assocations' management competency, underwriting standards, types of
real estate collateral and their locations, or borrower characteristics.

5. Formal resolution in the late 1930s and early 1940s

At the end of 1930, 499 associations were operating in Newark. By the end of 1944, 55 associations were still active in the city. 37 associations had avoided any changes, and the other 18 associations were all that were left of the 462 that had undergone some major structural event, including
liquidation, state action, reorganization, and merger. Table 6 tabulates the exit process by year and type of exit.

This section examines these events, grouping them into two large waves. Relatively few structural events occurred in the early and mid 1930s, especially on a per-year basis. The first large wave of resolution actions started in 1937 or 1938, and consisted mainly of closures of the institutions
in the poorest condition. The second wave, particularly in 1942 and 1943, was dominated more heavily by reorganizations, made possible by a large-scale federal intervention.

5.1 First wave of exit: liquidations and other closures

In the first wave, primarily during 1938, 1939, and 1940, exits were dominated by liquidations and appear to have been driven by conventional factors stemming from poor balance sheets, as well as pressure from depositors for withdrawals as measured by share prices.

Both voluntary liquidations and bulk transfers were voluntary elections to end the operations of an association. Discussions among B&L leaders in the late 1930s makes clear that the two were considered close substitutes. In a voluntary liquidation, an association placed all of its assets
into a liquidating corporation. In a bulk transfer, an association sold off some its assets to another association, and placed the rest in a liquidating corporation. In either case, liquidation itself was not immediate but depended on the pace of real estate sales. Voluntary liquidation was far
more common, particularly before 1940. After 1940, more reorganized associations were able and willing to purchase assets in bulk.

Actions by the state regulator, the Department of Banking and Insurance, were less common than liquidations. After 20 B&Ls were closed by the state in the early 1930s, one more was seized in 1938, and then 20 more in one day in April, 1940. Incompetence or manifest insolvency appear to have
motivated most of these actions. The seizures in 1940 were a long overdue effort to spur deeply frozen associations into formal liquidation. The Commissioner of Banking and Insurance stated the rationale: "The problem associations, for the most part, remained apathetic... As time went on, it
became increasingly evident that in the absence of any voluntary correction or dissolution by a substantial number of these associations, the department would be obliged to take action."35 Nevertheless, in most cases of poor condition, B&Ls were left to build capital by slowly retaining earnings and taking back apportioned profits. Illiquidity was not countered with seizure but rather addressed through
withdrawal restrictions.

To understand which characteristics were associated with the closures from 1938 to 1940, I use a probit framework in which the dependent variable is a dummy for closure, defined as voluntary liquidation, bulk transfer, or state seizure. The set of characteristics is the same set as used in
section 3.4, with the addition of each association's share price.

The marginal effects and standard errors are reported in Table 7. I first report results using data from 1937, predicting closure from 1938 to 1940 in the 1st column, and then using data from 1939 predicting closure in 1940 in the 2nd column. The 1939 data are helpful for
many reasons, including that the data on share prices are first available in 1939. Since share prices are not available for every association and selection may be an issue, the 3rd, 4th and 5th columns report results using the subset of associations with share prices, first including share prices
as an explanatory variable by itself, then adding the other controls, and finally without the share price.

The results are generally unsurprising insofar as they indicate that measures of balance sheet distress predict closures in this period. These results will contrast, though, with those in the next subsection in which reorganizations in 1942 and 1943 are studied instead of these closures.

In terms of credit quality, associations with relatively large amounts of real estate were strongly more likely to close in these years. A B&L with a 10 percentage point greater share of assets held as real estate in 1939 had a roughly 8 percentage point higher probability of closure in
1940. For example, at the extreme, at the end of 1939 there were 17 associations that had more than 75 percent of their assets in real estate, and 14 of those closed the following year.

Share prices have strong predictive power over closures as well, as associations with lower share prices were strongly more likely to close in 1940. The magnitude is roughly that every 2 cent level change in the 1939 share price is associated with a 1 percentage point increase in the probability
of closure. Interpreting this relationship is not necessarily straightforward. Associations with very low share prices could have had shareholders clamoring for serious action such as liquidation. However, share prices are still observed for some institutions after their closures in this period,
and the prices rarely changed afterward. This indicates that the incentives of shareholders to seek liquidation to satisfy their withdrawal requests were limited, as liquidation was still protracted. Another possibility is that share prices capture a range of other unobserved characteristics that
are related to viability.

As a check that the regulatory seizures are not completely driving the results, the first column of the next table (Table 8) replicates this analysis but excludes associations that were seized by the state regulators. The coefficient on real estate decreases moderately,
and the coefficient on arrears drops to nearly zero, suggesting perhaps that the state officials targeted associations with extreme values of each. A look at the data confirms that the associations seized by regulators were those at the very upper end of the distribution of real estate burdens.
This indicates that the voluntary liquidations and bulk transfers were less a direct function of real estate burdens and more a function of the ability to return profits to shareholders and to allow them to sell their shares at less sacrificial prices.

Finally, the second column of 8 examines closures in 1941. The characteristics that predict the 1941 closures are quite different, and this anticipates some of the results in the next section. Credit quality, share prices, and profitability all have little predictive
power. Instead, the liquidations are generally more difficult to predict. Liquidity of assets is important, reflecting the ability to make a short-term payout during liquidation, and to some extent associations with more old style mortgages were more likely to liquidate, suggesting they weren't
embracing the new world of mortgage lending.

Two developments may help explain the 1941 closures. First, the build-up to World War II changed the return to liquidation, making it more attractive to all associations. A special report written by HOLC officials in August 1941 noted the remarkable changes in conditions:

In the four month period, since the rendering of the original report covering Newark, conditions have changed materially... The combination of [defense orders and war contracts] has greatly stimulated employment and brought many new residents to Newark. This has had a noticeable effect
upon occupancy, rents, and the sales market.

These sentiments were echoed at around the same time in all of the key primary sources, including the Sunday Call and the Building and Loan Guide and Bulletin. The second development is the ongoing reorganization program. Many of the
associations that reorganized in 1942 began preparations in 1941, for example by applying for loans from the RFC. Had economic conditions not changed and had the reorganization program not developed, the fate of those associations would likely have been different.

5.2 Second wave of exit: reorganizations

In the second wave of structural events at Newark B&Ls, primarily during 1942 and 1943, reorganizations became a much more dominant trend. Of the 201 associations still active at the beginning of 1941, 145 either closed or reorganized during the subsequent two years. As a result, generally
speaking, the choice for these associations was not whether to have a major structural event, but whether that event would be a complete exit or some form of reorganization.

By about 1940, the strategy for reorganization coalesced into a set of procedures with three main features:

An association's assets were split in two, with the good assets placed in a new association and the bad assets placed into an association whose only purpose was liquidation, i.e. a "bad bank" in modern vernacular. This usually involved some form of consolidation of multiple associations in
order to ensure the new association was large enough to be viable. Shareholders would be issued participation certificates in the liquidating corporation and shares in the new association which together would have face value equal to the old shares.36

Most of the new associations required infusions of liquidity in order to meet pent-up demand for payments on withdrawals or matured shares. This liquidity came in the form of a loan from the Reconstruction Finance Corporation (RFC), or possibly an investment in shares by the Home Owners' Loan
Corporation (HOLC). The RFC loan was secured first by the real estate held in the liquidating association and second by a general lien on all of [both] associations assets; the RFC cash would be placed in the new association.

The new association qualifies for insurance from the Federal Savings and Loan Insurance Corporation.

Altogether, 103 associations went through reorganization, though not all using the above set of procedures. Those procedures were not fully formulated until 1939, and they were implemented most heavily in 1942 and 1943, with 68 associations reorganizing in those years. The hiatus during 1940 and
1941 was largely due to demands by the federal agencies involved that any further reorganizations be part of a comprehensive program for the closure or rehabilitation of all troubled B&Ls in Newark, a large task which required careful planning and some legislative
accommodation.37 Newark was joined by several other cities in requiring this "community program." Similar community programs were conducted in
Philadelphia, New Orleans, Milwaukee, Baltimore, Chicago, and Altoona, PA.38 Uniquely dysfunctional was the state of New Jersey, though, with 20 separate
community programs of its own.39

According to data on RFC activities available at the National Archives, the large majority of loans were approved in 1941 and 1942 and dispensed in the subsequent year. The records indicate 59 loans were approved by the RFC to Newark B&Ls between 1938 and 1943, totaling $13.7 million. In
comparison, all Newark B&Ls had $51 million in assets at the end of 1943.

The core of the post-war savings and loan industry in Newark belonged to 14 consolidated associations that emerged from this reorganization process. All but 2 were formed by associations that were approved for loans by the RFC. After resisting this outcome for nearly a decade, the core of
Newark's thrift industry now offered accounts that were insured by the Federal Savings and Loan Insurance Corporation, were free of the burden of foreclosed real estate, and were relatively large, professionally managed, with permanent offices. In 1950, when the troubles of the 1930s were finally
just memories, the 14 reorganized associations held 92 percent of Newark B&L assets. In comparison, the 103 associations that, through reorganizations and asset transfers, were consolidated into these 14 had controlled only 42 percent of Newark B&L assets in 1930.

Asset segregation and liquidity infusions were both critical. Table 9 helps to elucidate this, by showing the reorganization plan of the Enterprise B&L. According to RFC loan files, Enterprise sent 80 percent of its assets to the liquidating association.
Altogether, Enterprise did not have a very large core business worth preserving, which is why 10 other Newark associations simultaneously reorganized with Enterprise in the same manner, forming the Penn Savings and Loan Association.

With a large RFC loan to fund Enterprise's liquidating association, 70 percent of the share liabilities were put in the new association (a bit more than typical). B&L managers learned to expect withdrawals of about 30 percent of new associations' share liabilities in the first few months,
which would be met with the RFC cash.40 Indeed, the RFC loan file notes that Enterprise's withdrawals were still restricted, and outstanding withdrawal
requests totalled about 12 percent of share capital in 1941. In addition, while Enterprise's reserves were quite large relative to real estate, 40 percent of those reserves had been created in 1933 by recapture of profits, and so were specially earmarked for return to shareholders if managers could
avoid tapping them.

Without the RFC loan, Enterprise would not have been well positioned to solve its withdrawal problem. As an illustration, there were 15 Newark associations that experimented with asset segregation in 1933, but the 3 consolidated associations that resulted had difficulty gaining traction because
their liquidity positions were essentially unchanged.41 Their balance sheets indicate they were chronically short on liquid assets post reorganization; two
of three never had more than 2.5 percent of their assets in cash or securities. Two eventually voluntarily liquidated, and the third liquidated via bulk transfer of assets to one of the new federally insured associations. As noted in the previous section, their shares were still traded in the
secondary market in 1939, at around 50 cents on the dollar. With this experience in mind, after the first version of the new reorganization strategy was presented at the state B&L convention in 1937, the most important question involved liquidity:

"What of these liabilities which are our real headaches, our unpaid maturity list? ... Where do we get the money to pay off the withdrawals and the maturities? How can we continue as a going concern, simply by the bookkeeping operation of transferring some bad assets from one
association to another, or from one account to another in the same association?"42

Asset segregation was not a panacea, but it did accomplish at least two things. First, it clarified to existing shareholders the extent of their maximum potential exposure to losses on the bad assets. Second, and probably more importantly, it allowed new investors to have their capital invested
wholly in good assets. It had been difficult to attract new capital into a B&L that had, say, 50 percent real estate on its books, since that capital's return would be lower than the return on the new mortgage investments it allowed.

To conclude this section, it is informative to repeat the type of analysis used in the previous section with a probit framework in which the dependent variable is a dummy for reorganization after 1941. The set of right hand side variables is the same. The results are reported in Table 10. The estimation reported in the first column includes all associations active at the end of 1941, while the second includes just those that closed or reorganized, setting aside those that survived.

Naturally, associations reorganizing had large amounts of real estate, but it is interesting that they had even larger amounts than associations that liquidated during the same time period. One way to think about this is that, by the end of 1941, the associations with large amounts of real
estate that had not yet liquidated were clearly looking for some way to avoid that fate. After all, the large majority of associations either closed or reorganized after 1941, so the decision for most was not whether to take some major action but the form of that action.

Larger associations were more likely to reorganize. As troubled as some of the larger associations were, their size ensured that they still had enough "good" assets to form the core of a new association. Smaller associations that reorganized tended to do so while merging their good assets with
many other associations. Reorganizing associations also had converted almost all of their mortgages away from pledge mortgages into direct reduction mortgages, a sign that they were taking steps to embrace the modern mortgage industry.

6. Modern Parallels

The trading of B&L shares on secondary markets resembles practices that characterize modern closed-end mutual funds. Funds of this sort have a fixed amount of shares outstanding at any given time and do not offer to pay out withdrawals. This is advantageous to the extent that these funds are
able to hold less liquid assets. In place of withdrawals, investors can trade their shares on a secondary market, typically at some discount to the net asset value of the shares. Since there is no specific withdrawal value, these funds do not "break the buck" in the same sense as money market
mutual funds or B&Ls for that matter. As a thought experiment, Newark B&Ls could be thought of as having operated in a manner similar to money market mutual funds that abruptly converted into closed-end mutual funds. Ignoring the profound regulatory barriers that make such a conversion
purely a thought experiment, such a move would dramatically alter the nature of investors' claims in a way that captures important part of B&L investors' 1930s experience.

The imposition of withdrawal restrictions at B&Ls also has some parallels to developments in the auction-rate securities (ARS) market during the 2007-2009 financial crisis. Holders of ARS were accustomed to the option of selling their holdings if desired at periodic auctions, but became
unable to do so as demand at auctions decreased in early 2008 and investment banks declined to provide backstops against auction failure. The aftermath was litigious and involved basic questions of what investors were promised, much like the questions over the obligations of B&Ls to their
investors. Ultimately, after litigation by state attorneys general and federal and state regulators, some investment banks agreed to buy back ARS.43

Finally, focusing on the nature of financial crises at intermediaries more broadly, what these episodes have in common is the inability of these institutions, during periods of macroeconomic or financial distress, to fulfill promises that were made either explicitly or implicitly during stronger
economic times. Such unfulfilled promises can create create particularly persistent problems when they involve real estate assets with long durations. For example, today the resolution of representation and warranty issues related to securitization transactions continue to weigh on mortgage
lenders. These issues stem from contractual agreements made during boom times that proved difficult to fulfill or unwind during post-crisis macroeconomic environments. The problem in each case is not necessarily the promise itself but rather the lack of clear provision for what to do when the
promise breaks down.

7. Conclusion

This paper has studied how B&Ls unwound their obligations after taking on large amounts of foreclosed real estate during the 1930s. Resolution among Newark, NJ B&Ls was postponed as those institutions exploited the gray area between illiquidity and insolvency. After a large balance sheet
shock, insolvency was given a temporal dimension, as the persistent reality of lower real estate prices was downplayed. The time horizon of a B&L as a whole did not always reflect the short-term needs of some shareholders to access their savings during the Depression. The secondary share market
reflects this most starkly; illiquidity only protected the solvency of those with long time horizons, while those shareholders who sold their shares realized the steep losses others would not.

The federal government's role stands out as particularly helpful in resolving Newark B&Ls' issues. The intervention by the Reconstruction Finance Corporation starting in 1939 is notable for finally matching a patient funding source to real estate assets, and for creating a substantial amount
of new liquidity for the first time in a decade. In fact, this paper adds a new dimension to the set of federal programs described by Snowden (2003) as transforming the thrift industry during the 1930s. Snowden shows that, nationally, the future of the thrift industry lay within a new
federally-designed system of national charters, FHLB membership, and FSLIC insurance. New Jersey thrift leaders at first rejected each of these innovations. In 1945 there were still no federally chartered S&Ls in Newark, an anomaly. By that time, though, B&L managers and shareholders had
capitulated to the comprehensive overhaul carefully designed in the late 1930s by federal authorities.

Not all federal programs had equally lasting impacts. This paper has not discussed much the discount facilities of the Federal Home Loan Bank System or the troubled asset relief available through the Home Owner's Loan Corporation. Not many Newark associations were able to qualify for FHLB
membership, and FHLB collateral requirements were stricter than those of the RFC program as those two institutions had very different structures. The Home Owners' Loan Corporation was likely more helpful with its purchases of distressed mortgage loans. However, the HOLC did not purchase the most
distressed mortgages possible; rather, it purchased those that were creditworthy given restructuring.44 In a previous study I have suggested that the HOLC
was in many ways a lenders' program, purchasing mortgages from lenders at generous terms, and I have no reason not to believe that was the case in Newark. In fact, it is sobering that, even as ambitious, large, and generous as the HOLC was, it was still insufficient to deal with problems on the
scale of those at Newark B&Ls.

Appendix: Data and textual sources

New Jersey B&L balance sheet data were published each year in the Annual Report of the Commissioner of Banking and Insurance. Until 1939, these data record the condition as of the fiscal-year end of each association. Starting in 1939, the reports recorded the
condition of each B&L on December 31st of each year. The post-1938 vintage data are preferred whenever possible for the purposes of comparability, even though most balance sheets did not change much over the course of a year as many of these associations were quite frozen.

Prices for shares on the secondary share market were published in a weekly Newark newspaper, the Sunday Call, as early as January 1939, and continue to be published until December 1940. Quotes may have been published in 1937 or 1938 as well, but I have not yet been
able to view the newspaper in those years.

Throughout the text I make references to loans from the Reconstruction Finance Corporation to Newark B&Ls. All of this information is from the Records of the Reconstruction Finance Corporation, Record Group 234, stored at the National Archives in College Park, Maryland. Basic information on
the number and size of loans approved to Newark B&Ls was gathered from the "Index to Loans Made to Banks and Railroads," boxes 1-27, which is alphabetically ordered. I also make references to some loan files with more detailed information. The archives have many thousands of boxes of loan
files to various types of entities, and so in practice, I have had time to view only a limited number of files. Loan files for the West End and Warranty B&L associations are stored in Box 42 of the "Records of Declined and Cancelled Loans, 1932-1946" as both loans were eventually cancelled;
Warranty ultimately executed a bulk transfer, whereas the West End arranged for a liquidity infusion from a source other than the RFC. Altogether, these are two of the four RFC loans to Newark B&Ls that were cancelled, out of the 59 that were approved. The loan files for the Enterprise,
Outlook, and Woodside B&L associations are stored, respectively, in boxes 57, 139, and 193 of the "Paid Loan Case Files, compiled 1932-1942." Note that those records are arranged in two groups, those paid before 1942 and those paid during 1942, and the box numbering restarts at 1 for loans
paid during 1942. These three loans were paid during 1942.

"Lessons from the Great American Real Estate Boom and Bust of the 1920s," NBER Working Paper No. 15634, 2010.

Figure 1: Advertisements for broker services for B&L share sales

Note: This figure displays three newspapers advertisements, in small rectangles vertically arranged. The first is from the ''Newark B&L Share Exchange'' and states that ''Our cash prices are usually higher for building & loan shares, see us before you sell, no commissions charged.'' The second is from a ''Eisele, King, & Studdiford,'' members of the New York Stock Exchange, who state they do business in building and loan shares, along with banking and insurance stocks and other securities. The third is from C. T. Melander & Co., which states that the firm buys and sells shares of the Eleventh Ward B&L, with immediate cash paid. All three advertisements list telephone numbers and street addresses.

Source: Newark Sunday Call, 1 January 1939, part III p. 5.

Figure 2: Stylized balance sheet implications of real estate sales

Note: The figure gives an initial balance sheet, and shows what would happen to the balance sheet after two different transactions. The initial balance sheet has assets consisting of $1 cash, $39 in mortgage loans, and $60 in real estate, while the liabilities consist of $75 in shares, $5 in apportioned profits, and $20 in loss reserves. If $20 of real estate is sold for $12 of cash, the assets then consist of $13 in cash, $39 in mortgage loans, and $40 in real estate, while the liabilities consist of $75 in shares, $5 in apportioned profits, and $12 in loss reserves. If $20 of real estate is sold for $20 of shares (at book value), then the assets consist of $1 of cash, $39 in mortgage loans, $40 in real estate, while the liabilities consist of $55 in shares, $5 in apportioned profits, and $20 in loss reserves.

Figure 3: Share price listing excerpt

Note: The figure reproduces an excerpt of a newspaper quotations list for B&L shares. The preamble states that the quotes were ''Furnished by Eisele, King, & Studdiford,'' and further states ''These quotations are for Newark associations, unless otherwise specified. All quotations are subject to confirmation. The quotations should not be taken to represent the book value of the shares listed. They are merely approximate bid prices at which shares are currently quoted in the local market. In some cases associations expect to pay liquidating dividends in excess of the amount quoted. A bid is not an appraisal.--Editor.'' The quotations listed are as follows, with the name of the association and the bid price:

Figure 4: Distribution of share prices for B&Ls active at the beginning of 1939

Note: This figure has a graph with share prices on the horizontal axis, from 0 to 80 cents on the dollar, and the density on the vertical axis, from 0.0 to 0.05. There are 15 vertical bars indicating the distribution of share prices. The highest bars are around 40, with the bars on the left and the right generally smaller, roughly similar to a pyramid. The bars are very short around 20 and below as well as around 60 or above.

Data are the first quotes available for each association in the first quarter of 1939

Figure 5: Share prices plotted against apportioned profits per share

Note: This figure has a scatterplot with apportioned profits per share on the horizontal axis, from 0.0 to 25.0, and share prices on the vertical axis, from 10 to 70. There are a few hundred dots indicating each association's pair of data points. The dots have a general upward trend: at the far left of the horizontal axis, the dots are centered around 30, whereas the dots are centered closer to 40 at 15.0 on the horizontal axis. There is also a line that indicates the general trend in these dots, starting at approximately (0, 33) and ending at approximately (25,55).

* jonathan.d.rose@frb.gov, Federal Reserve Board of Governors. The views expressed here are solely the responsibility of the author and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System or of anyone else associated with the Federal Reserve System.Return to Text

1. The focus on B&Ls in the mid-Atlantic region in this paper is deliberate, as B&Ls were unusually numerous prior to the Depression in this region, with roughly 500 based in Newark alone, and the 1930s recovery of these institutions was remarkably prolonged compared to the national pattern. Of an estimated 12-13 thousand B&Ls active across the country in 1930, more than 4,000 were located in Pennsylvania and about 1,500 in New Jersey. The activity in Maryland is not well documented as B&Ls were wholly unregulated in that state until the 1940s, but crude estimates suggest around 1,000 to 1,500 associations. The focus on New Jersey is due to its superior data, and the sub-focus on Newark is due to the rich history of the 499 B&Ls, most very small, that operated in that city. B&Ls in this region lagged the pattern of recovery typical for B&Ls in most of the country, where closures and reorganizations were largely finished by 1939. Return to Text

2. Much of the country's B&Ls operated mainly with equity shares. Despite being equity, these shares were subject to withdrawal like deposits. Some states, including Ohio and California, allowed B&Ls to explicitly accept deposits or instruments similar
to certificates of deposit. Return to Text

3. The transition to savings and loan terminology occurred during the 1930s and 1940s. It was partly a re-branding, but it also reflected a set of important institutional changes. Return to
Text

4. Along these lines, Piquet (1930) tabulates the occupations of New Jersey B&L presidents and secretaries, and finds they were most commonly builders, realtors, and insurance brokers, as well as merchants, clerks, and accountants. In this sense, the
growth of the B&L industry was a development endogenous to the relative immaturity of institutional mortgage markets in late 1800s and early 1900s. Snowden (2003) rejects an alternate hypothesis that the small size of most B&Ls was chosen in order to ease peer monitoring. Larger and more
geographically diverse associations had been more numerous during the late 19th century but many failed in a large wave during the 1890s. Return to Text

5. I use data from 1930 in this example because 1930 is the first year in which reserves and unapportioned profits are reported separately from apportioned profits. Return to Text

6. Some measure is available in RFC loan files which are careful to characterize the collateral available. For example, at the West End B&L, the largest association in Newark, the majority of owned real estate parcels were traditional 1-4 family
residential properties, but by value apartment buildings constituted about two-thirds of the available collateral. From a small sample of RFC loan files, apartment building loans and real estate appear to be more common at the larger associations, while the non-residential properties held by
smaller associations were mixed use properties such as a store combined with a dwelling. At the Enterprise B&L which is discussed later in this paper, 15 of 18 real estate parcels were 1-4 family residences, and the other 3 were mixed-use properties. Return to
Text

7. See Foote, Gerardi, and Willen (2008) for a discussion of the double trigger. Return to Text

8. HOLC officials were in good position to observe these trends since they were in charge of selling their own foreclosed properties. Source: Field Report titled "Survey of Economic, Real Estate, and Mortgage Finance Conditions in Five Counties in Northern
New Jersey," p. 11, September 30, 1939; Box 48, City Survey File; Records of the Home Owners' Loan Corporation, Record Group 195.3; National Archives II, College Park, MD. Return to Text

9. Report on Newark, NJ, p. E111; Box 4, City Survey Files; Records of the Home Owners' Loan Corporation, Record Group 195.3; National Archives II, College Park, MD. Return to Text

10. As an interesting historical note, Piquet (1930) states that the 1929 stock market crash led to a small crisis of confidence in New Jersey B&Ls, sparking withdrawals and freezing up some institutions. This episode would be in line with the idea that
the stock market crash was important for the uncertainty it created. Return to Text

11. Eventually this was modified to stipulate that, if in each month an association used one-third of its net receipts to pay maturities or add to maturity reserves and another one-third to pay withdrawals, then shareholders were categorically barred from
suing that association to seek a withdrawal. Return to Text

12. Report titled "Comparison of HOLC activities and the building and loan situation with economic, real estate, and mortgage finance conditions in northern New Jersey," p. 5; Box 52, City Survey Files; Records of the Home Owners' Loan Corporation, Record
Group 195.3; National Archives II, College Park, MD. Return to Text

13. Building and Loan Guide and Bulletin, July 1940, p. 56. Return to Text

14. Building and Loan Guide and Bulletin, February 1940, p. 49 Return to Text

15. Field Report titled "Summary, Survey of Essex County New Jersey," p. 1, October 30, 1935; Box 48, City Survey File; Records of the Home Owners' Loan Corporation, Record Group 195.3; National Archives II, College Park, MD. Return to Text

16. Report titled "Comparison of HOLC activities and the building and loan situation with economic, real estate, and mortgage finance conditions in northern New Jersey," p. 5; Box 52, City Survey Files; Records of the Home Owners' Loan Corporation, Record
Group 195.3; National Archives II, College Park, MD. Return to Text

17. This reserve building was required by order of the state regulator and was probably the most significant state-level intervention. Of course, modern accounting rules would have required even larger provisioning at
earlier dates. The set of policies governing reserve building were implemented as Orders 1 and 1A, on March 14, 1933, authorized by emergency legislation passed in the preceding days. These orders were modified by Orders 3 and 3A, dating to May 23, 1933. This laws was originally set to expire
within one year, but was repeatedly renewed, with the last renewal that I can find preserving it until 1940. Return to Text

18. The reclassification of apportioned profits was a serious blow to borrowers as well. In the traditional "pledged share" B&L loan, a borrower accumulated shares just as an investor did; when the shares matured they would be used to extinguish the full
principal debts. Admittedly, the mixing of a share contract on the liability side with a mortgage on the asset side is confusing. One way to think about this is to imagine a fully amortized mortgage in which a bank, rather than using the non-interest portion of the monthly payment to extinguish
part of the principal debt, instead invested it in equity shares of the bank. The term of such a loan would not be fixed but rather would depend on the profitability of the institution itself; highly profitable institutions would return greater profits, allowing shares to mature faster. The
opposite can happen as well, though. When apportioned profits were taken back and new profits were limited if they existed at all, borrowers were forced to make payments for longer periods than they had anticipated. Some frustrated borrowers defaulted or moved their loans to other institutions,
further depriving B&Ls of needed income. Return to Text

20. Building and Loan Guide and Bulletin, August 1936, p. 25. Return to Text

21. For a contemporary description, see, for example, Sunday Call 5 January 1941, part V p. 3. Return to Text

22. Real estate sales were reported as "one of the most important factors" for the "increased activity" during 1939 in this share market. Some demand for shares also came from mortgage borrowers who were able to pay some of their outstanding debts with
shares in the association from which they had borrowed, but this type of exchange appears to have been clearly secondary in importance to the real estate transactions. The Sunday Call describe these transactions as "not nearly as frequent as real estate sales" but
nevertheless there was "little doubt that they have been a contributing factor in creating a market for shares of many associations" (9 July 9 1939, part III p. 6). Return to Text

23. The Sunday Call described speculators as key to maintaining liquidity for some shares with infrequent real estate sales (9 July 1939, part III p. 6). Return to Text

26. Sunday Call, 4 January 1942, part IV p. 9. Along the same lines, in April 1941 a Federal Home Loan Bank Board document noted that "share sales are fast drying up due to absorption of cheap certificates." "Report on Newark,
New Jersey" p. 7; April, 1941; Box 47, City Survey File; Records of the Home Owners' Loan Corporation, Record Group 195.3; National Archives II, College Park, MD). Return to Text

27. Building and Loan Guide and Bulletin, June 1939, p. 58. Return to Text

28. Some sources from the period note that these transactions were subject to the approval of the state regulator. However, the reality was that every real estate transaction required the approval of the state regulator - with one
major caveat. The caveat is that if associations adopted a real estate classification plan which gave each parcel a grade from A to D, they were able to unload the "C"s and "D"s without seeking regulatory approval. It appears that regulatory approval was either easily obtained or that
associations made use of this classification scheme, since the market for shares was so widespread. See Building and Loan Guide and Bulletin, June 1939, p. 56. Return to Text

29. Building and Loan Guide and Bulletin, December 1938, p. 30. Return to Text

30. As a side note, the discussion highlights the difficulty of defining a singularly meaningful market price of real estate in a depressed market. Given two offers with the same nominal prices, B&Ls valued the offer with shares differently than the offer
without shares. Likewise, given the same two offers, the actual cost to the purchaser changed when shares were involved. Return to Text

31. Field Report titled "Survey of Economic, Real Estate, and Mortgage Finance Conditions in Five Counties in Northern New Jersey," p. 15, September 30, 1939; Box 48, City Survey File; Records of the Home Owners' Loan Corporation, Record Group 195.3;
National Archives II, College Park, MD. Return to Text

32. As a final note, there is some indirect evidence that the secondary market was, to a degree, a substitute for more formal resolution. After associations exited, trading in their shares reportedly fell, but was not eliminated. Trading was noted as
sometimes occurring in the shares both of associations in liquidation and of the various "bad bank" entities that held defaulted mortgages and real estate loans spun off during reorganizations. (See a discussion in the Sunday Call, 4 January 1942, part IV, p. 9.) In
this data set spanning price quotes in 1939 and 1940, there were 95 associations that exited during those years and that had quotes available before their exits. After their exits, prices were only quoted for 50, a bit more than half. In contrast, of the associations with share prices available and
that survived to the end of 1940, about 85 percent continued to have prices quoted up until the end of 1940. Return to Text

33. Since the B&L loan contract used installment shares as sinking funds, arrears on loans may have been characterized in this manner as well. Return to Text

34. Serial plan associations were the most traditional form, with new share investments only opening up at specified points in time, typically once a quarter. Non-serial plans allowed them to be opened at any time. Optional plan associations still used
installment shares but the payments were optional (at the discretion of the shareholder) rather than required every month. Return to Text

35. Building and Loan Guide and Bulletin, July 1940, p. 25. Return to Text

36. Associations also had the option of writing down shareholder's capital during the reorganization. It is unclear how many or if any associations in Newark exercised the option Return to Text

37. The FSLIC also insisted on having the ability to be a joint receiver with the state regulator in case of an insured association's failure, and the FHLB insisted on having a law allowing for easier conversion into federal charters. Both of these required
legislative fixes, and those actions are actually somewhat remarkable given the extreme resistance to the federal program demonstrated in New Jersey during the 1930s. Return to Text

38. These programs were partly done for the sake of the industry itself. Federal officials, however, emphasized their necessity so that the reorganized and insured institutions would not be put at risk by the continued presence of frozen institutions. See the
annual reports of the Federal Home Loan Bank Board in 1938-9 (p. 107), 1939-40 (also p. 107), and 1940-41 (p. 120). Return to Text

41. Authority for asset segregation was always implicitly available, and was made explicit in two pieces of state legislation in the early 1930s, and then in a 1937 reorganization act, and again modified in 1939 and later. The method of segregation used in
1933 was slightly more cumbersome, as these associations were required to set up trust entities, which were liquidated by special trustees under the supervision of the state regulator. Nevertheless the mechanics were essentially identical and it is difficult to believe that the distinction between
trust accounts and liquidating corporations can alone explain the long delay in asset segregation. Return to Text

42. Building and Loan Guide and Bulletin, August 1937, p. 15. Return to Text

43. See Austin (2010) for more background on the ARS market. Return to Text

44. B&Ls in Essex county held about $325 million in mortgage loans as of the end of 1933, and the HOLC purchased $45 million in mortgages from all the mortgage lenders in the county from 1933 to 1936, but it is impossible to know how much of that came
from B&Ls, and Newark is most of Essex county but not all of it. While there were sizable declines in mortgage loans outstanding at B&L's during the years in which the HOLC purchased mortgages, there were similarly sized declines before and after those years as well. As far as I know, there
is no comprehensive data on the amount of loans the HOLC purchased from B&Ls specifically on a city, county or state basis. Return to Text